Advantages and Drawbacks of Filing for Chapter 13 Bankruptcy
Most people do not want to file for bankruptcy, but if forced, they will always choose Chapter 7 over Chapter 13. After all, who wants to be in bankruptcy for 3-5 years, as a chapter 13 case requires? At first glance, it appears to be a bad deal. When I meet with a new client, they first say, “I want this to be a Chapter 7 bankruptcy; I don’t want Chapter 13.”
“Can you explain why you say that?” I am always curious. The answer reveals that they have learned about it from multiple people and that it’s not good. These same people are frequently enthralled by the prospect of filing for Chapter 13 bankruptcy. It’s been a while since we discussed the benefits of Chapter 13 bankruptcy on the forum, so I’d resurrect the list to cheer up those facing bankruptcy.
The Advantages of Chapter 13 Bankruptcy
A Chapter 13 bankruptcy has key benefits, including dealing with your property and tax debt.
Let’s begin to take a look at each of them.
The first and most well-known advantage of Chapter 13 is its ability to keep a home safe from foreclosure. Under normal circumstances, banks require borrowers to repay their entire mortgage arrearage when they fall behind. For most struggling families, this is not possible, and they end up losing their homes to foreclosure. Filing bankruptcy does not give you a free house; you must still pay your mortgage, but assuming you can, the automatic stay prevents your lender from foreclosing.
Assistance with Car Payments
Consumers should also be aware that the basic principle of lien stripping — modifying secured debt to meet the collateral value — also applies to car loans. Debtors in Chapter 13 who are underwater on a car loan can “cram down” the loan to match the car’s value.
Assistance with Mortgage Modification
This is yet another significant advantage of Chapter 13. Not only can you dictate to your lender the terms under which you will repay past-due mortgage payments, but you can also force them to modify your mortgage in some cases. While first mortgages on a debtor’s primary residence cannot be modified in bankruptcy, second and third mortgages can be modified through a process known as lien stripping. If you are underwater on your home due to the balance of your first mortgage, additional mortgage liens are considered “under secured” and may be removed or stripped by the bankruptcy court. When a mortgage is stripped, the debtor pays the loan off with the rest of their unsecured debt at pennies on the dollar.
The Drawbacks of Chapter 13 Bankruptcy
Of course, Chapter 13 bankruptcy has drawbacks; the most notable is the length of time a case lasts. Chapter 13 plans typically last 3-5 years. Throughout that time, the debtor must devote all their disposable income to the payment plan. Every penny left over after expenses must be used to repay unsecured creditors. This is a significant commitment that will last a long time.
Regardless of the available relief, many families do not want their financial decisions to be restricted in this way.
Is the Chapter 13 bankruptcy best option to consider?
So there you have it. Although it has some drawbacks, Chapter 13 bankruptcy can have benefits, particularly if you are underwater on secured debts or facing foreclosure. If you’d like to schedule a free consultation to discuss your options, please contact one of Illinois Bankruptcy Lawyers in Chicago. They have extensive experience with consumer bankruptcy and assisting clients in getting back on track financially.